Investing in real estate is a great way to make some money. You can generate regular cash flow as well as see your initial investment grow in value. And since real estate has a low correlation to other commodities, you’re likely to weather economic downturns thanks to your investment property. Plus, you also get to make use of depreciation, a tax-deduction that lets you subtract the cost of buying your investment property and the cost of repairs you make to it. And you can also place your real estate into a self-directed IRA to take advantage of other tax benefits (including 1031 exchanges, which let you avoid capital gains taxes altogether). That’s a lot of wins!
How to find a good investment property
Looking for an investment property makes you into a bit of a Goldie Lockes because you find yourself saying, “This property’s too good and this property’s too bad,” until you’ve found the property that’s just right. What does a just-right property look like? Its price isn’t too high and it doesn’t need too many repairs.
Finding the right property is going to take some work. In part, this is because real estate websites tend to show you attractive homes rather than fixer-uppers. So, you’ll have to do a deep dive using your favorite search engine. Or, you may want to try networking, print real estate guides, or just driving around.
Networking can give you an advantage over other investors because you can learn about properties that haven’t been listed yet. In theory, you should already have contacts who are real estate agents, property managers, lenders, other investors, contractors, and landlords. These people are rich sources of wisdom and information, so hopefully, you’ve already been picking their brains.
If you decide to go for a drive in the area you plan on investing in, look for homes that show signs of being on the market for a while. An unmowed lawn, vinyl siding that needs a wash, a pile of mail, etc. These are all indicators that the owners may be eager to finally get the property of their hands.
Your internet deep dive will take you off the beaten digital path:
- Check out Auction.com for bank-owned or foreclosed properties. You can get granular enough with your search that you can sort homes by location, property type, and even condition.
- Check out Craigslist for properties that are being sold by owners eager to avoid real estate agent fees. These listings are likely to be as detailed as professional listings and priced competitively as well.
- Lastly, head on over to LoopNet. This is a resource for investing in small buildings with multiple units. Like Auctions.com, you can get into the real nitty-gritty with your search and sort properties by location, price, number of units, and even the age of the building.
Options to purchase as an investment property
There’s more to real estate than buying a house and renting it. And that’s good news for everybody because that makes real estate a more accessible form of investment. One of the real estate’s great advantages as an investment opportunity is that there are so many degrees of personal involvement in real estate and a great variety of opportunities to mitigate your exposure to risk.
1. Invest In A Bigger Real Estate Deal
If you pool your resources with other people you can make investing in real estate even easier. There are ways to do this beyond just getting some friends and family together. There are investment platforms that will allow you to be a property owner for as little as $500. You don’t even have to be an accredited investor for some of these options!
RealtyMogul, for example, gives you a plethora of choices ranging from residential and mixed-use to commercial and retail. You don’t even get charged a fee! Instead, property holders take care of the expenses. And you can start to make a profit mere weeks after your project gets funded
Meanwhile, Fundrise rigorously screens its potential investments, with only 5% of projects being accepted. The minimum investment to participate is $500 and you pay 0 to 3% in fees. In return, you get access to a large variety of investments and you don’t even need to be an accredited investor to participate.
2. Buy A Rental Property
The two biggest hurdles people have to clear when committing to a rental property are tenants and having the cash upfront. You can hire a property manager that will, among other things, deal with your tenants. Cash upfront, however, is a bit more tricky because it’s not merely cash up front. You also need to have a detailed budget that factors in everything from regular upkeep and inevitable vacancies to emergency repairs and various fees. So long as your budget leaves you with a worthwhile profit, an investment property may be right for you. And, really do consider a property manager; they’re worth every penny because they handle everything!
HomeUnion® makes this process even more streamlined by giving you the opportunity to buy single-family rental properties that already have tenants and cashflow!
3. Flipping Houses
Flipping a home is when you buy a home with the intention of selling it soon after. To make this work you either need to be handy enough to make the repairs yourself at a low cost or have a contractor who will make the repairs at a low cost. So long as the home looks good enough to buy you should be good to go. Just keep in mind that you may end up with a home that doesn’t sell right away, which will eat into your profit.
4. Rent A Portion Of Your Existing Home
You don’t need to buy an investment property to rent a property. You can always rent out a portion of your own home! You could rent out a spare room, a basement, or your attic. If this idea really appeals to you and your in the market for a new home you could even buy a duplex. That way you can rent out one apartment and live in the other!
Some advantages of renting out a portion of your primary residence are that you get to test drive being a landlord and that it’s harder for a tenant to skip out on their rent when they share a wall with their landlord!
5. Real Estate Investment Trusts (REIT)
If you want to invest in real estate without any of the work of owning an investment property, then a real estate investment trust (REIT) may be for you. REITS are funds that allow you to invest in mortgage instruments, bonds, and real estate stocks. There are several types of REITs: equity, mortgages, and hybrid. REITs allow you to invest in properties, mortgages, and a mixture of both, respectively.
REITs tend to provide high returns. Your income is composed of the interest people pay on their mortgages. Some popular REITs are:
- American Capital Agency (NASDAQ: AGNC)
- Annaly (NYSE: NLY)
- Realty Income (NYSE: O)
Since REITs are traded just like stocks, they also have far greater liquidity than actual real estate, meaning that can sell them off for cash quickly.
What to look for in a good investment property
You’re going to want a property that you can afford in terms of both time and money. Don’t go for what’s flashy; go for what your potential renters may want and will be able to afford. You’ll want the property that’ll give you the greatest return in the long run. That means a property that renters will want to stay in, with reasonable maintenance requirements on your end, and something that will both appreciate in value and give you equity over time.
You don’t want a property that will cost too much money to repair. That’s because if you spend too much on repairs and have less money for your down payment that you’re likely to end up with unfavorable loan terms. A bad mortgage with high interest may translate into operating at a loss or without a sizable profit. That’s one of the surest ways to end up with an investment that goes belly-up!
Why location matters in an investment property
Location location–you know the rest! You want your home in a neighborhood that’s either going to be or already is a hot commodity. Your neighborhood will also inform whether or not you’re more likely to get a steady monthly cash flow or property appreciation, which will impact your investment strategy
First, find out if the neighborhood attracts more buyers or renters. Then assess what percentage of the area is retail. Even if the shops and eateries have yet to be built, you’ll be able to gauge whether the community is going to grow or stagnate. And don’t limit yourself to local investments. So long as you do your due diligence you can invest wherever you want.
Different loan requirements for investment properties
Banks have stricter loan requirements when it comes to investment properties because of the increased risk. Afterall, you’re more likely to default on an investment property than your primary residence. Additionally, mortgage insurance isn’t an option for investment real estate. That explains why lenders tend to ask for a 20% to 30% downpayment and have higher interest rates, which is why you shouldn’t go with a property that will require so much repair that you won’t have enough money to cover these and other expenses.
Additionally, lenders expect you to have less debt and a better credit score in order to give you a loan. They may also want you to have some cash in reserve to cover any unexpected costs, like an emergency repair or a vacancy. The measures lenders take to protect themselves from taking a loss should inform you as to how big of an undertaking investing in real estate is.
What are investment property goals?
Real estate has a lot going for it. To begin with, real estate is a way to get out of the stock market. Even REITs, which are traded like stocks, still have a low correlation to other commodities, which lowers your exposure to risk.
Real estate investment is also something that can eventually replace your current income stream, so long as you accumulate and hold on to properties. Co-investment is also an option. As is investing with a real estate sponsor/syndicator, which is a method of real estate investment wherein you own a portion of a larger property that someone else finds and manages.
Concurrently, your property is also likely to appreciate in value so long as you hold onto it, further increasing your profit and your purchasing ability. There are shorter-term opportunities as well, like house flipping or investing in REITs.
What are the risks of investing in real estate?
Chief among the reasons to invest in real estate is that it’s less risky than stocks. If you find the right neighborhood, you may find your property appreciating significantly and even being able to raise your rent because of the great demand for living space in your area. You can also mitigate your risk by handing over a large portion of the responsibility to someone else, whether it be hiring a property manager, going through a sponsor/syndicator, or investing in REITs. It’s this large range of investment opportunities as well as the plethora of available tax deductions that make investing in real estate so appealing.
Is an investment property right for you?
You now have some idea of what it takes to find and purchase investment real estate, but there are still many questions to ask yourself about whether or not you should invest in real estate. Are your debts paid off? Do you have a medical condition that’s likely to require financial attention? Do you have children whose education you want to pay for? Do you really want to get involved in real estate investing, even if a property manager takes care of the majority of the work for you? Know thyself! The answers to these questions may mean the difference between failure and success.
Real estate is a great alternative to investing in stocks that doesn’t have to take up all your time. Depending on your resources and risk tolerance, you can go in for a little or a lot. Similarly, your return on investment can be modest or enough to replace your current income. Remember, when everyone needs a place it means that there’s money to be made all over the place! And that’s why real estate offers such a rich tapestry of investment opportunities.